US demographics are frequently cited as part of the bear case on stocks.
The idea is that retiring boomers, who bought up equities heavily during their formative years, will gradually unwind their holdings, as they spend their retirement money, and shift towards a risk-free posture.
There’s research out there that supports this idea.
But in a recent note, in which he reiterates his “raging bull”-thesis on US stocks, Citi’s Tobias Levkovich makes a counter argument regarding demographics.
Its not about the baby boom generation. It’s about the baby boomers’ babies… their echo.
A new wave of baby boom echo children can help fund this new economic growth as they begin to save for retirement just as their parents did back in the early 1980s. Moreover, they have little memory of the past 12 years of equity market challenges. They were not big investors when markets peaked in 2000 since the first wave of new 35-year old savers (beginning in 2013) were 22 years old in 2000 and had college debt, not new funds to invest. They do not recall the tech bubble bursting in terms of stock markets like their parents do and the same could be said of the baby boomers in 1982 when their parents suffered weak stock market returns in the 1970s. In addition, we would expect pension funds to begin reallocating to stocks in order to meet their required rates of return given current positioning away from equities and much more heavily towards bonds that might begin to lose money once rates climb again in the future.
The crucial issue of baby boomers possibly exiting stocks (as they dissave in retirement or prefer steady fixed income rather than more volatile equity assets) comes up in client conversations regularly and they have to some degree but not entirely. After withdrawing roughly $400 billion from equity mutual funds, stocks still account for greater than $4 trillion of mutual fund assets comprising nearly 55% of US household aggregate financial assets. Moreover, with cash yields well below dividend yields, something not seen since the 1950s, it costs income starved investors too much to exit stocks now and that may be stuck with low rates into 2014 while stocks climb. Individual investors rarely sell their shares when stock prices are appreciating since greed can overtake common sense as witnessed in the tech boom of the late 1990s. Thus, we don’t envision continued
stock fund exits in an environment where equity indices are rising.
This chart, showing that the 25-59 35-39 year old population is going to start growing again after a lull, is the key idea here.